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Upward Pressure on Fleet Costs Threatens to Increase TCO

The conclusion of calendar-year 2017 marked the fifth consecutive year that overall fleet costs remained stable, despite fuel prices starting to increase, which next to depreciation is the second largest fleet expense category. From 2012 to 2016, stable fuel prices have helped to offset inflationary pressures fleets have been experiencing in a number of areas ranging from maintenance labor costs to price increases for replacement tires driven by higher commodity prices.

Recently, I conducted a survey of several hundred fleet managers to identify emerging industry trends. One recurrent theme expressed by fleet managers was the concern that fleet costs are starting to experience upward pricing pressures. “Costs are on the rise – raw material pricing is affecting tire pricing, fuel pricing is on the rise, as well as interest rates. How do we mitigate what might appear to be uncontrollable expenses,” said Brenda Davis, strategic sourcing commodity manager at Baker Hughes, a GE company.

These inflationary forces are being felt in a variety of areas, ranging from higher vehicle acquisition to compensate for the proliferation of onboard safety equipment, to increased material costs being passed on to end-users in higher pricing for replacement parts and upfits. Below are other commonly cited cost pressures,

More Fleet Transaction Fees: One cost factor challenging fleets is the increase in fleet transaction fees. “Many FMCs are using third-party vendors to manage certain programs, such as tolls, registrations, and MVRs, whose additional transaction fees get passed on to customers,” said Brett Switzky, fleet, trucking, & records retention manager for American Family Mutual Insurance.

Higher Replacement Tire Costs: The primary factor putting upward pressure on tire costs is the increase in raw material costs. The cost of commodities used to manufacture tires, such as the price of oil and rubber, continue to be the key factors driving the price of replacement tires for passenger cars. “Like-for-like replacement tire prices for passenger cars increased 5-10% in calendar-year 2017 compared to CY-2016. We could see another 5-10% increase in 2018 if raw materials continue to increase at the same rate as they did in 2017,” said Chad Christensen, senior strategic consultant for Element Fleet Management.

Increased Cost of Replacement Parts. Higher commodity prices are causing the price of replacement parts to increase. Also, individual parts are increasingly being aggregated into more expensive modules. For instance, fuel pumps, which used to be replaced as an individual item, are now part of an entire module. Another example is wheel bearings and replacement seals, which used to be replaced individually, are now are part of an entire wheel-hub assembly complete with electronics and sensors.

Increase in Repair Costs: Vehicle complexity is increasing the cost to repair an accident-damaged vehicle. When a vehicle sustains damage in an accident, the additional amount of electronics and components in a vehicle drives repairs up dramatically. “In addition, with the demands for increased fuel-efficiency and safety, vehicles have become lighter, thus more susceptible to additional damages. Add the safety components, such as airbags, sensors, and additional structural supports, the cost adds thousands of dollars to the repair costs. How does a fleet manager go to management with cost projections that are uncontrollable?” said Bob Martines, president and CEO of Corporate Claims Management.

Higher Labor Rates: During calendar-year 2017, maintenance expenses increased year-over-year compared to CY-2016. “The increase in maintenance expenses was primarily driven by a 5-7% increase in labor rates and parts costs,” said Christensen. Labor rates are increasing in high-cost-of-living metro areas. In addition, the shortages of service technicians is forcing providers to offer market-competitive wages to both attract and retain talent.

Acquisition Costs: Upfront acquisition costs are steadily increasing due to increased vehicle content, such as vehicle safety packages. “Whether its safety related, comfort, or new fuel-savings technology, they are causing costs to increase,” said Switzky.

Shift to More Expensive Synthetic Motor Oil: Preventive maintenance costs have been increasing as OEMs recommend more expensive, but longer-lasting, synthetic motor oils. The proliferation of smaller displacement engines in fleet applications is causing the shift to synthetic oil because it provides 50% better engine protection, maximizing engine life. “Changes in manufacturer requirements for oil specs are driving up the cost of preventive maintenance,” said Mark Lange, CAFM, managed maintenance consultant for Element Fleet Management.

Death by a Thousand Cuts: Many taxes that impact fleets are small, but add up. Taxes vary nationwide because there is no uniformity between states or even within a state. Governmental jurisdictions look for ways to generate more revenues through motor vehicle-related taxes, such as higher registration fees, additional taxes on tires and batteries, and environmental fees and surcharges. In addition, there is the on-again, off-again movement by states from a sales tax to a rental tax for leased vehicles and the “double-dipping” taxation that occurs when vehicles are transferred between states without any prorated rebate provision.

Controlling the Uncontrollable

Procurement studies reveal that 20% or more of total corporate spend is for purchases that could have been acquired at a lower cost. A key contributor to this inefficient spend is rogue spending, which is defined as not following corporate procurement policies when acquiring goods or services, such as making unauthorized purchases or buying from higher priced non-preferred suppliers instead of negotiated price discounts from preferred suppliers.

However, many costs are outside of our control and it is in times like these that fleet managers prove their mettle. When uncontrollable market forces drive up fleet cost, it takes the expertise of an in-house fleet manager to mitigate their financial impact. This requires a laser focus on developing creative cost-control strategies to ensure fleet operations continues to efficiently fulfill its corporate mission.

Market Trends

While technology is making vehicles safer, last longer, and be more environmentally friendly, it is also making them increasingly complex. As vehicles become more complex, so do all aspects of vehicle repairs.

The recent U.S tax law changes created a problem for employers who use a non-accountable vehicle reimbursement plan. Negative feedback has some companies reconsidering the viability of offering company-provided vehicles to help key employees mitigate the adverse impact of eliminated tax deduction.

A truck’s total cost of ownership (TCO) covers a specific range of expense variables, regardless of the make or model. The four lifecycle categories that influence TCO are fixed costs, operating expenses, incidental costs, and depreciation/resale value. A key factor that drives these lifecycle categories is a vehicle’s service life.

Most in procurement take the position that fleet’s primary responsibility is to buy assets and services, which annually can range from millions to tens of millions of dollars in expenditures. This amount of corporate spend requires it be managed by someone with superb negotiation skills and proven procurement acumen.

If you want to provide added value to your company, you need to view fleet as a business and not simply an aggregation of assets to be managed cost-effectively. The fastest way to improve your bottom line is to increase fleet utilization, which increases the productivity of each individual truck.

Blog: Vocational trucks are susceptible to being targeted for staged accidents, which involves maneuvering an unsuspecting employee driver into an intentional crash in order to make a false insurance claim or to file a lawsuit against the driver’s employer.

While the light-duty market for compressed natural gas vehicles has almost evaporated, new near zero emissions technology and drastic reductions in infrastructure costs have reinvigorated the market for medium- and heavy-duty applications — even for smaller fleets.

A fleet cost reduction program goes straight to the corporate bottom line. If a company operates at a 10% annual net profit margin, reducing annual fleet expenses by $100,000 is the equivalent of generating $1 million in sales. Although fleet managers manage hundreds of thousands to tens of millions of dollars in corporate assets, only half are incentivized to achieve targeted performance goals. I advocate incentivization should be a universal best practice extended to all fleet managers.

I believe volume penetration of fleets by autonomous vehicles will take much longer to occur than what is predicted in today’s optimistic forecasts. Conceptually, autonomous vehicles are technologically feasible, but, as they say, the devil is in the details. One thing is certain, as we trail blaze new ground, so too will we trail blaze new problems.

Corporate mobility management to evolve into multi-level responsibilities for asset lifecycle management, administration of multi-modal mobility services, and deployment of productivity and safety tools to support a mobile workforce in the field.

The key objective of end-user discussions is to match the truck with the fleet application. Once you have completed your discussions, make sure the completed upfit specs have been reviewed and approved by all parties prior to order placement. It is critical to have a documented sign-off to avoid misunderstandings that result in after-the-fact upfitting modifications.

Over the years, I have known many competent fleet managers. But, like salmons swimming upstream, not every promising fleet manager survives the challenges and rigors of day-to-day fleet management. It is understandable when fleet managers are fired for making expensive mistakes or when caught engaging in ethical transgressions, but, sadly, many more are terminated for circumstances that are entirely avoidable.